While legacy carriers across Asia have introduced their own budget carriers, Cathay Pacific steadfastly refused. Ironically, credit may go to the disgraced former CEO of United Airlines.

In a university speech last week, Cathay Pacific Chairman John Slosar told students that a dinner with ex-United CEO Jeff Smisek a few years convinced him Cathay Pacific should not start a low-cost subsidiary.

The most important thing he said was, ultimately the idea that you could have a separate [budget] airline … and your main brand doesn’t compete turns out to be a false assumption.

Smisek reasoned that a new low-cost subsidiary would cannibalize Cathay’s premium business model and points to United’s failed TED division and Delta’s failed SONG division as examples.

Slosar then argued that passengers choose an airline because they offer the most convenient service and schedule, not because they are full-service or budget.

That’s a tricky hypothesis if price is also not factored in…

Critics argue Cathay Pacific is missing out on a golden goose by failing to start its own budget carrier. They point to Hong Kong Airlines filling the gap and note that the region’s low-cost carriers from outside Hong Kong are capitalizing on Hong Kong.

Labor is the missing element to this discussion. Labor relations hit rock bottom during the Smisek tenure at United and think how important labor is for a budget carrier to thrive. Across Europe and Asia the recent boom of low-cost carriers is predicated, at least in part, on cheap(er) labor.

Cathay Pacific could easily turn Cathay Dragon into a budget carrier and expand its route map to more leisure destinations. But unless it sheds labor costs, cutting in-flight services and cutting ticket prices isn’t going to be a game-changer. Cathay Pacific captains currently earn $326K/year (USD). Meanwhile, junior FAs only earn about $25K/year.

CONCLUSION

Cathay has lost money for two years. While poor fuel hedging is partly to blame, Cathay faces fierce competitive pressure from all directions. Starting a new budget airline may indeed cannibalize its regional premium traffic, but reduced labor costs could return the airline to profitability.

About Author

Matthew

Matthew is an avid traveler who calls Los Angeles home. Each year he
travels more than 200,000 miles by air and has visited more than 120
countries over the last decade. Working both in the aviation industry
and as a travel consultant, Matthew has been featured in the New York
Times, Chicago Tribune, Wall Street Journal, USA Today, BBC, Fox News,
CNN, ABC, CBS, NBC, Al Jazeera, Toronto Star, and on NPR. Studying
international relations, American government, and later obtaining a
law degree, Matthew has a plethora of knowledge outside the travel
industry that leads to a unique writing perspective. He has served in
the United States Air Force, on Capitol Hill, and in the White House.
His Live and Let's Fly blog shares the latest news in the airline
industry, commentary on frequent flyer programs and promotions, and
detailed reports of his worldwide travel. His writings on
penandpassport.com offer more general musings on life from the eyes of a frequent traveler. He also founded awardexpert.com, a
highly-personalized consulting service that aids clients in the
effective use of their credit card points and frequent flyer miles.
Clients range from retirees seeking to carefully use their nest egg of
points to multinational corporations entrusting Matthew with the
direction and coordination of company travel.